Chante Burger, Sygnia
Investment Analyst
Investment insights
Jul 22, 2020

Some high tech products could turn out to be high cost traps

Fintech innovation has been an undisputed driving force behind lowering fees and improving customer experience in the financial industry for quite some time, but consumers need to be on high alert for “disrupter” investment products that may, on scrutiny, be high fee traps in the guise of low fee fintech.

Sygnia was a front runner in the SA market when we introduced the original robo adviser in May 2016 an algorithm driven financial planning service that requires little to no human supervision. We recently launched a simplified version that uses the same parameters to create a personalised plan for each user, while simultaneously reducing completion time and improving ease of use. We’re not the only ones; several other asset managers now also offer digital investment platforms. But not all robo advisers are created equal, and I urge anyone considering these investment platforms, or similar, to first consider a few factors so that they do not fall victim to strategically worded advertisements about so called “disrupter” products.

Many robo advisers themselves don’t carry additional fees the fees incurred are those of the underlying funds the robo adviser invests in. Others may charge an additional platform fee. But regardless of each individual company’s offering, fees charged on a retirement annuity RA should be as low as possible, because high fees cannibalise retirement savings in the long term. According to the Treasury, paying 2.5% in fees as opposed to 0.5% will erode 60% of your retirement savings over 40 years. We advocate that no RA fee should exceed 1%. This should be the total cost, including the management fee and all other charges, such as use of the platform, administration fees and transaction costs. Granted, some fees such as transaction costs related to the product cannot be marketed upfront as they are not always known in advance, but they should not be forgotten. So if you’re being sold on a promise like “our fees are always less than 1% excluding VAT” but trading and additional costs aren’t added in, then you’re likely to land up paying much more than 1% when all fees are added.

Low fees are especially important for digital self investment products because these tend to appeal to a younger target market Some financial services companies charge a percentage based fee, while others may make use of a sliding scale, whereby you often pay exorbitant fees for smaller investment amounts but get very beneficial rates for large sums. This latter fee structure is extremely disadvantageous for new investors or individuals just starting to think about their financial future. Herein lies the rub for this year’s new entrant to the market, which is the first in SA to offer a rand based flat fee of R4,500 a year for investments of above R300,000. On face value this is a great offer, especially if you have large amounts to invest, in which case fees can drop to as low as 0.2%. But for investments under R300,000 a percentage based fee structure kicks in and this translates to a steep 1.5% in fees.

Our data shows that 80% of the independent RA investments whether through our robo adviser or direct are less than R300,000. Granted, this data is only based on Sygnia investors, but if our data is even slightly representative of other SA investment houses it follows that the majority of investors investing via this flat flee digital platform are likely to land up paying 1.5% in fees. What’s more alarming is that the flat rand fee increases yearly with inflation. That may work out fine if you’re increasing your investments, but if the investment amount remains constant or decreases in poor market conditions the fee becomes absurd. Your retirement savings will steadily erode over 20 or more years.

When comparing robo adviser fees it’s equally important to look at what type of funds you’re investing in. Some companies offer one portfolio based on the client’s parameters risk, age and so on , while others may offer a combination of two or more portfolios. We offer a complex model of 10 portfolios, each consisting of between one and six underlying funds. Understanding what you’re buying into is crucial, and robo adviser investors need to do some serious due diligence: know what you’re investing in and review the performance. However, gauging performance can be tricky as it depends not only on many economic, social and political factors but also your chosen investment horizon. Are you looking for steady performance over a longer time horizon, or is this a short term investment for which immediate performance is your goal? Always do the groundwork; your older self will thank you for it.

Source: Business Day (Late Final) – 23 Jul 2020